IGS fares
—-•<?£•
Northwest would use a fleet of DC-9-30s,
but would actually be offering no new
routes. It has a transatlantic service into
West Germany.
THE PAN AM/BA RESPOMSE
While the US majors wait on Allied Air
Attaches, Pan Am and BA are reacting to
protect their markets. The route swap
agreement, first signed for three years in
1975, was extended in 1978 and 1981, but
was not officially renewed in 1984. So,
although the route swap has since
continued de facto, both carriers are now
free to enter each other's markets, and
started with the opening of the summer
1988 schedules. Both Pan Am's Conrad
Jacoby, general manager IGS and Central
Europe, and BA's Bob Austin, general
manager Germany, admit that this is in
response to the new applications. "We
think that the existing system meets the
market requirements," says Jacoby, "but if
people insist on competition then we will
offer it."
"The route swap agreement was vital to
our survival on the IGS at the time," says
Austin. "We now have to accept that the
demand of the West Berlin Senate and
Bonn is for competition. But in that case
we have to look at applying commercial
criteria in terms of the profitability over
each route that we operate." He points out
that the loss-making lifeline route to
Hannover (the closest large West German
city to Berlin) grew only 5 per cent last
year, compared with BA's own average of
12 per cent, and a total air traffic growth
Continental's bid to reduce fares in the
Berlin market brings the West German
Government's subsidy into question.
This amounts to approximately DM100
million a year, and is applicable to local
passengers originating in West Berlin. It
is not applicable to international travel.
For each passenger Bonn pays the
carrier approximately 14 per cent of the
sector economy fare, and the passenger
pays the balance. As IGS tickets are
exempt from VAT, while German
domestic air tickets are subject to 14 per
cent VAT, it could be argued that, even
after allowing for the EEC's share of
VAT revenues, the IGS subsidy is largely
paid by West German domestic
passengers.
If Continental's bid is accepted, would
Bonn withdraw or reduce the subsidy?
"There is a political requirement to have
all forms of transport to West Berlin
operating at an optimum level," says Dr
Dieter Kabisch, "so if something
happens to one the other can take the
strain. Hence there is a form of subsidy
for all means of transport to the city." He
points out that Bonn is currently plan
ning to spend large sums to upgrade
Berlin's rail links, so some form of air
subsidy is likely to remain.
Although the normal subsidy is 14 per
cent, in the case of Hannover it amounts
to 17-7 per cent. This indicates that a
possible future change would involve
lowering the subsidy on the busy, profit
able routes and increasing it on the thin
ner lifeline routes. Thus Continental's
claim that it could generate new traffic
with lower fares would only hold if it
reduced fares by more than the loss of
subsidy.
BATTLE FOR BERLIN
Fares comparison
Main IGS route Carrier
TXL-FRA PA
Main West German
Domestic Route
FRA-HAM LH
Mileage
269
257
Sector economy fare
DM192
(Bonn pays DM31,
making total DM223)
DM255
(LH receives DM224)
Total 1987 passengers
1,329,340
969,142
Note: When considering the costs behind the above sectors, it should be borne in mind that, while Lufthansa's
landing costs at Hamburg are higher than Pan Am's at Tegel, Pan Am's fuel costs are higher owing to the restricted
altitude of the air corridors linking West Berlin with West Germany.
of 14-7 per cent in the Berlin market. If
BA's profits on the thick routes are
eroded, then its ability to cross-subsidise
the thinner routes is reduced. "We try to
provide as broad a community service as
possible," says Austin. "The new carriers
do not want the costs associated with the
thin routes."
"You cannot look at Berlin as a purely
commercial operation—there are broader
responsibilities," says Jacoby. "The
competitive aspect of the market has been
addressed by ourselves and British
Airways, so all the new carriers are talking
about is a redistribution of the existing
traffic." Both he and Austin forecast that
the 1988 market will at best equal 1987's
as the loss of the one-off visitors to the
750th anniversary celebrations is offset by
natural growth. "If we can maintain 1987's
carryings it will be a major success for
Berlin," he says. The BFG (the Berlin
airport company) agrees.
Pan Am and BA still have their original
licenses, so they will be in position long
before the newcomers (if any) are licensed.
BA is basing an additional 737-200 at
Tegel to operate four flights a day on the
Munich route, which was previously the
preserve of Pan Am. BA wanted the
Frankfurt route as well but could not get
satisfactory slots.
Pan Am intends to fly alongside BA to
Cologne/Bonn with two 727-200s a day,
and to Diisseldorf with three a day. Addi
tionally, the Pan Am Express commuter
operation will put two ATR42 twin-
engined turboprops on the Bremen and
Hannover routes, with a limited operation
on BA's seasonal route to Sylt.
Apart from competing with BA, Jacoby
has plans for Pan Am Express to open
some new international routes. "I see the
Reagan initiative as calling for an opening
of Berlin to new markets. Growth will
come from new international routes, not
from more competition on the IGS," he
says.
Both Jacoby and Austin emphasise Pan
Am's and BA's commitment to Berlin and
over 40 years of service to the market.
Their appeal to the Air Attaches asks
them not to risk destabilising the present
system by licensing additional carriers.
However, the Air Attaches are unlikely to
be able to resist the pressure to bring in
"new blood", or the argument that it was
only the threat of outside competition that
ended the route-swap monopoly.
With TWA's application before them
the issue was quite straightforward. When
American filed the situation became more
complicated, but both carriers would
probably have been licensed, with the
shortage of well-timed slots in West
Germany scaling down American's plans.
Now that Continental and Northwest are
in the running, the Air Attaches are faced
with a thorny problem.
West Berlin's vital air access would
certainly be threatened by the all-out war
that would result if all the applications
were granted in full. On the other hand,
the deregulation movement is powerful.
So Berlin waits as the applicants muster
their political lobbying powers. •
FLIGHT INTERNATIONAL, 23 April 1988